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Today we are going to look at The E.W. Scripps Company (NASDAQ:SSP) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for E.W. Scripps:
0.043 = US$24m ÷ (US$2.1b – US$210m) (Based on the trailing twelve months to September 2018.)
Therefore, E.W. Scripps has an ROCE of 4.3%.
Does E.W. Scripps Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see E.W. Scripps’s ROCE is meaningfully below the Media industry average of 8.3%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside E.W. Scripps’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
In our analysis, E.W. Scripps’s ROCE appears to be 4.3%, compared to 3 years ago, when its ROCE was 2.6%. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
E.W. Scripps’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
E.W. Scripps has total liabilities of US$210m and total assets of US$2.1b. As a result, its current liabilities are equal to approximately 10% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
What We Can Learn From E.W. Scripps’s ROCE
E.W. Scripps has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better buy than E.W. Scripps. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.